50 common test questions and answers

CFIN - Corporate Finance Scott Besley

9780357515150 

7th Revised edition 50 common test questions and answers All chapters covered

Level: ADVANCED 1 / 3

Contents Introduction to Corporate Finance...............................................................3 Financial Statements, Cash Flow, and Taxes...............................................3 Analysis of Financial Statements.................................................................4 Time Value of Money...................................................................................4 Bonds, Bond Valuation, and Interest Rates..................................................5 Risk and Return...........................................................................................5 Stock Valuation............................................................................................7 Cost of Capital.............................................................................................7 Capital Budgeting Techniques.....................................................................8 ....................................................................................................................8 Cash Flow Estimation and Risk Analysis......................................................8 The Basics of Capital Structure....................................................................9 Dividend Policy..........................................................................................10 Working Capital Management...................................................................11 Financial Planning and Forecasting............................................................11 Multinational Financial Management.........................................................11 Final Conceptual Questions.......................................................................12 2 / 3

Introduction to Corporate Finance

1.Question: What is the primary financial goal of a corporation, and

why does it align with shareholder wealth maximization?

Answer: The primary financial goal is to maximize shareholder

wealth, represented by the market value of the company's stock.This aligns with shareholder wealth maximization because it reflects the firm's ability to generate cash flows and manage risk, ensuring efficient allocation of resources.

2.Question: Explain the difference between profit maximization and

shareholder wealth maximization.

Answer: Profit maximization focuses on short-term earnings, often

ignoring risk and timing of cash flows. Shareholder wealth maximization considers long-term stock value, accounting for risk, cash flow timing, and sustainability.

3.Question: How does the agency problem arise in corporate

finance?

Answer: The agency problem arises when there is a conflict of

interest between managers (agents) and shareholders (principals).Managers may prioritize personal benefits over shareholder interests, leading to inefficiencies.Financial Statements, Cash Flow, and Taxes

4.Question: Why is the cash flow statement considered more

important than the income statement for corporate finance decision- making?

Answer: The cash flow statement provides information about a

firm's liquidity and its ability to generate cash to meet obligations.Unlike the income statement, it avoids non-cash items, such as depreciation, offering a clearer view of financial health.

5.Question: How does depreciation affect cash flow, even though it is

a non-cash expense?

Answer: Depreciation reduces taxable income, lowering the

company's tax liability. This tax shield increases operating cash flow by reducing cash outflows for taxes.

6.Question: What is the difference between operating cash flow

(OCF) and free cash flow (FCF)?

Answer: Operating cash flow is the cash generated from core

business operations, while free cash flow subtracts capital

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